Global Financial Stability Report, April 2021: Preempting a Legacy of Vulnerabilities
Global Financial Stability Report, April 2021
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- Published: April 6, 2021
Overview
- Publication date: April 2021.
- Central theme: Extraordinary policy measures have eased financial conditions and supported the economy, but there is a pressing need to act to avoid a legacy of vulnerabilities while avoiding a broad tightening of financial conditions.
- Key cross-cutting risks:
- Stretched valuations and rising financial vulnerabilities as unintended consequences of pandemic-era actions.
- An asynchronous and divergent recovery between advanced and emerging market economies.
- Large external financing needs among several emerging markets, with particular vulnerability if a persistent rise in US rates causes a repricing of risk and tighter financial conditions.
- Corporate sector overindebtedness in many countries, with notable differences by firm size and sector.
- Concerns about credit quality of hard-hit borrowers and profitability that are likely to weigh on banks’ risk appetite.
Chapter 1 — Global Financial Stability Overview: An Asynchronous and Divergent Recovery May Put Financial Stability at Risk
- Findings:
- Extraordinary policy measures have eased financial conditions and helped contain financial stability risks.
- The recovery is expected to be asynchronous and divergent between advanced and emerging market economies.
- Several emerging markets face challenges due to large external financing needs, especially if a persistent rise in US rates brings about a repricing of risk and tighter financial conditions.
- The corporate sector in many countries is emerging from the pandemic overindebted, with differences depending on firm size and sector.
- Concerns about credit quality of hard-hit borrowers and profitability are likely to reduce banks’ risk appetite.
- Policy emphasis:
- Ongoing support remains necessary, but authorities must act to avoid a legacy of vulnerabilities while avoiding broad tightening of financial conditions.
- Support balance sheet repair by strengthening management of nonperforming assets.
- Rebuild buffers in emerging markets to prepare for a possible repricing of risk and reversal of capital flows.
Chapter 2 — Nonfinancial Sector: Loose Financial Conditions, Rising Leverage, and Risks to Macro-Financial Stability
- Findings:
- Nonfinancial firms and households entered the COVID-19 crisis with historically high levels of leverage, reflecting relatively loose financial conditions since the global financial crisis.
- Extraordinary policy support cushioned the COVID-19 shock but contributed to a further increase in nonfinancial sector leverage.
- An easing of financial conditions tends to accelerate leverage buildups, complicating an intertemporal policy trade-off.
- Loose financial conditions provide a short-term boost to growth but accentuate downside risks to growth in the medium term.
- The existing high and rapidly building leverage amplifies downside risks to future growth.
- Policy recommendations:
- Macroprudential policy can temper leverage buildups and strengthen resilience, mitigating future financial stability risks.
- While near-term policy support is needed to aid recovery, policymakers should be mindful of increasing macro-financial stability risks and consider early action to tighten selected macroprudential tools to address rising nonfinancial sector vulnerabilities.
- Develop and deploy macroprudential toolkits for the expanding nonbank financial sector.
Chapter 3 — Commercial Real Estate: Financial Stability Risks During the COVID-19 Crisis and Beyond
- Findings:
- The COVID-19 crisis has hit the commercial real estate sector hard; containment measures reduced demand for commercial property.
- Some adverse impacts—particularly on retail, office, and hotel segments—could be permanent due to increased virtual activity and potential relocation outside large cities.
- There is little evidence of large price misalignments at the onset of the pandemic, but signs of overvaluation have emerged in some economies.
- Misalignments in commercial real estate prices, especially when interacting with other vulnerabilities, increase downside risks to future growth because of the possibility of sharp price corrections.
- The large size of the commercial real estate sector and its heavy reliance on debt funding suggest potentially significant implications for financial stability.
- Policy recommendations:
- Continued policy support remains warranted at the current juncture to keep financial conditions easy and stimulate aggregate demand to aid sector recovery.
- Recognize that easy financial conditions may contribute to increased financial vulnerabilities and persistent price misalignment.
- Swiftly deploy targeted macroprudential policy tools to address vulnerabilities in commercial real estate markets.
- Broaden macroprudential policy coverage to include nonbank financial institutions, which are important in commercial real estate funding markets.
Source: Global Financial Stability Report, April 2021: Preempting a Legacy of Vulnerabilities
Content in this bundle
- Dataset overview
- dataset overview
- Dataset overview
- Chapter 1
- Chapter 1 Online Annex
- Chapter 2
- Chapter 2 Online Annex
- Chapter 3
- Chapter 3 Online Annex
- Executive Summary
- Foreword
- Full Report